10-Q 1 lsbk-20190630x10q.htm 10-Q lsbk 20190630 10Q





United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.:  000-51821





 

 

LAKE SHORE BANCORP, INC.

(Exact name of registrant as specified in its charter)

United States

 

20-4729288

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

31 East Fourth Street, Dunkirk, New York

 

14048

(Address of principal executive offices)

 

(Zip code)

(716) 366-4070

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12b-2 of the Exchange Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

LSBK

 

The Nasdaq Stock Market LLC



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,  and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]No  [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  [X]No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

Large accelerated filer

Accelerated filer

Non-accelerated filer  

Smaller reporting company

Emerging growth company  

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [  ]        No  [X]



 

 

 

 



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:



There were 5,948,290 shares of the registrant’s common stock, $0.01 par value per share, outstanding at August 8, 2019.

 


 









 

 

 



 

TABLE OF CONTENTS

 



 

 

 

ITEM

 

PART I

PAGE



 

 

 

1

FINANCIAL STATEMENTS

 



-

Consolidated Statements of Financial Condition as of June 30, 2019 (Unaudited) and December 31, 2018

1



-

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

2



-

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

3



-

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and  2018 (Unaudited)

4



-

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and  2018 (Unaudited)

5



-

Notes to Unaudited Consolidated Financial Statements

6

2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

35

3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51

4

CONTROLS AND PROCEDURES

51



 

 

 



 

PART II

 



 

 

 

1A

RISK FACTORS

52

2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

52

6

EXHIBITS 

53

SIGNATURES

 

 

53



 

 





 

 


 

PART I Financial Information

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary











 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2019

 

2018



 

(Unaudited)



 

(Dollars in thousands, except share data)



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

8,321 

 

$

8,880 

Interest earning deposits

 

 

334 

 

 

3,244 

Federal funds sold

 

 

13,122 

 

 

18,627 

Cash and Cash Equivalents

 

 

21,777 

 

 

30,751 

Securities available for sale

 

 

78,390 

 

 

86,193 

Federal Home Loan Bank stock, at cost

 

 

1,830 

 

 

1,545 

Loans receivable, net of allowance for loan losses 2019 $3,863;  2018 $3,448

 

 

440,175 

 

 

392,471 

Premises and equipment, net

 

 

9,358 

 

 

9,417 

Accrued interest receivable

 

 

2,128 

 

 

1,913 

Bank owned life insurance

 

 

21,711 

 

 

21,469 

Other assets

 

 

2,683 

 

 

1,949 

Total Assets

 

$

578,052 

 

$

545,708 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

              Interest bearing

 

$

395,707 

 

$

377,131 

              Non-interest bearing

 

 

61,765 

 

 

55,327 

Total Deposits

 

 

457,472 

 

 

432,458 

Short-term borrowings

 

 

8,000 

 

 

 -

Long-term debt

 

 

21,650 

 

 

24,650 

Advances from borrowers for taxes and insurance

 

 

3,156 

 

 

3,134 

Other liabilities

 

 

6,110 

 

 

5,662 

Total Liabilities

 

$

496,388 

 

$

465,904 

Stockholders' Equity

 

 

 

 

 

 

Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,827,741 shares issued and 5,957,890 shares outstanding at June 30, 2019 and 6,004,664 shares outstanding at December 31, 2018

 

$

68 

 

$

68 

Additional paid-in capital

 

 

30,995 

 

 

30,916 

Treasury stock, at cost (869,851 shares at June 30, 2019 and 823,077 shares at December 31, 2018)

 

 

(9,547)

 

 

(8,805)

Unearned shares held by ESOP

 

 

(1,407)

 

 

(1,449)

Unearned shares held by compensation plans

 

 

(123)

 

 

(200)

Retained earnings

 

 

60,306 

 

 

59,145 

Accumulated other comprehensive income

 

 

1,372 

 

 

129 

Total Stockholders' Equity

 

 

81,664 

 

 

79,804 

Total Liabilities and Stockholders' Equity

 

$

578,052 

 

$

545,708 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 



 









1


 

Lake Shore Bancorp, Inc. and Subsidiary



 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2019

 

 

2018

 

2019

 

2018



(Unaudited)



 

(Dollars in thousands, except per share data)

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Loans, including fees

 

$

5,168 

 

$

4,445 

 

$

10,023 

 

$

8,817 

   Investment securities, taxable

 

 

283 

 

 

256 

 

 

585 

 

 

486 

   Investment securities, tax-exempt

 

 

364 

 

 

397 

 

 

754 

 

 

790 

   Other

 

 

137 

 

 

169 

 

 

252 

 

 

282 

         Total Interest Income

 

 

5,952 

 

 

5,267 

 

 

11,614 

 

 

10,375 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

   Deposits

 

 

1,104 

 

 

701 

 

 

2,076 

 

 

1,318 

   Short-term borrowings

 

 

13 

 

 

 -

 

 

13 

 

 

 -

   Long-term debt

 

 

134 

 

 

140 

 

 

267 

 

 

279 

   Other

 

 

18 

 

 

19 

 

 

37 

 

 

39 

         Total Interest Expense

 

 

1,269 

 

 

860 

 

 

2,393 

 

 

1,636 

         Net Interest Income

 

 

4,683 

 

 

4,407 

 

 

9,221 

 

 

8,739 

Provision for Loan Losses

 

 

350 

 

 

115 

 

 

425 

 

 

190 

         Net Interest Income after Provision for Loan Losses

 

 

4,333 

 

 

4,292 

 

 

8,796 

 

 

8,549 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

   Service charges and fees

 

 

451 

 

 

463 

 

 

872 

 

 

914 

   Earnings on bank owned life insurance

 

 

123 

 

 

86 

 

 

242 

 

 

170 

   Unrealized (loss) gain on equity securities

 

 

(1)

 

 

 

 

35 

 

 

14 

   Unrealized loss on interest rate swap

 

 

(61)

 

 

 -

 

 

(94)

 

 

 -

   Recovery on previously impaired investment securities

 

 

13 

 

 

68 

 

 

26 

 

 

90 

   Net gain on sale of loans

 

 

 

 

 

 

 

 

   Other

 

 

19 

 

 

30 

 

 

52 

 

 

53 

         Total Non-Interest Income

 

 

546 

 

 

657 

 

 

1,135 

 

 

1,247 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

   Salaries and employee benefits

 

 

2,137 

 

 

2,034 

 

 

4,398 

 

 

4,099 

   Occupancy and equipment

 

 

599 

 

 

561 

 

 

1,223 

 

 

1,148 

   Data processing

 

 

338 

 

 

335 

 

 

676 

 

 

663 

   Professional services

 

 

262 

 

 

255 

 

 

496 

 

 

479 

   Advertising

 

 

194 

 

 

169 

 

 

352 

 

 

322 

   Postage and supplies

 

 

58 

 

 

54 

 

 

123 

 

 

118 

   FDIC Insurance

 

 

34 

 

 

36 

 

 

70 

 

 

74 

   Other

 

 

325 

 

 

338 

 

 

612 

 

 

637 

         Total Non-Interest Expenses

 

 

3,947 

 

 

3,782 

 

 

7,950 

 

 

7,540 

         Income before Income Taxes

 

 

932 

 

 

1,167 

 

 

1,981 

 

 

2,256 

Income Tax Expense

 

 

127 

 

 

161 

 

 

278 

 

 

314 

         Net Income

 

$

805 

 

$

1,006 

 

$

1,703 

 

$

1,942 

Basic earnings per common share

 

$

0.13 

 

$

0.17 

 

$

0.28 

 

$

0.32 

Diluted earnings per common share

 

$

0.13 

 

$

0.16 

 

$

0.28 

 

$

0.32 

Dividends declared per share

 

$

0.12 

 

$

0.10 

 

$

0.24 

 

$

0.20 



 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

























2


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income









 

 

 

 

 

 

 



 

 

Three Months Ended June 30,



 

 

2019

 

2018



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

805 

 

 

1,006 

Other Comprehensive Income (Loss), net of tax expense (benefit):

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)

 

 

 

626 

 

 

(297)

Reclassification adjustments related to:

 

 

 

 

 

 

 

Recovery on  previously impaired investment securities included in net income, net of tax expense

 

 

 

(11)

 

 

(54)

Total Other Comprehensive Income (Loss)

 

 

 

615 

 

 

(351)

Total Comprehensive Income

 

 

$

1,420 

 

$

655 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

Six Months Ended June 30,



 

 

2019

 

2018



 

 

(Unaudited)



 

 

(Dollars in thousands)

Net Income

 

 

$

1,703 

 

$

1,942 

Other Comprehensive Income (Loss), net of tax expense (benefit):

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale, net of tax expense (benefit)

 

 

 

1,264 

 

 

(977)

Reclassification adjustments related to:

 

 

 

 

 

 

 

Recovery on previously impaired investment securities included in net income, net of tax expense

 

 

 

(21)

 

 

(71)

Total Other Comprehensive Income (Loss)

 

 

 

1,243 

 

 

(1,048)

Total Comprehensive Income

 

 

$

2,946 

 

$

894 



 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 





3


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2019 and 2018 (Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Unearned

 

Unearned Shares

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Additional

 

 

 

 

Shares

 

Held by

 

 

 

 

Other

 

 

 



 

Common

 

Paid-In

 

Treasury

 

Held by

 

Compensation

 

Retained

 

Comprehensive

 

 

 



 

Stock

 

Capital

 

Stock

 

ESOP

 

Plans

 

Earnings

 

Income (Loss)

 

Total



 

(Dollars in thousands, except share and per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2018

 

$

68 

 

$

30,719 

 

$

(7,309)

 

$

(1,535)

 

$

(540)

 

$

56,181 

 

$

791 

 

$

78,375 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,942 

 

 

 -

 

 

1,942 

Other comprehensive income, net of tax benefit of $278

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,048)

 

 

(1,048)

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(156)

 

 

156 

 

 

 -

ESOP shares earned (3,968 shares)

 

 

 -

 

 

24 

 

 

 -

 

 

43 

 

 

 -

 

 

 -

 

 

 -

 

 

67 

Stock based compensation

 

 

 -

 

 

22 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22 

Compensation plan shares granted (5,329 shares)

 

 

 -

 

 

 -

 

 

51 

 

 

 -

 

 

(51)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (9,638 shares)

 

 

 -

 

 

 -

 

 

(91)

 

 

 -

 

 

91 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (13,942 shares)

 

 

 -

 

 

54 

 

 

 -

 

 

 -

 

 

147 

 

 

 -

 

 

 -

 

 

201 

Purchase of treasury stock, at cost (34,300 shares)

 

 

 -

 

 

 -

 

 

(572)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(572)

Cash dividends declared ($0.20 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(458)

 

 

 -

 

 

(458)

Balance - June 30, 2018

 

$

68 

 

$

30,819 

 

$

(7,921)

 

$

(1,492)

 

$

(353)

 

$

57,509 

 

$

(101)

 

$

78,529 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2019

 

$

68 

 

$

30,916 

 

$

(8,805)

 

$

(1,449)

 

$

(200)

 

$

59,145 

 

$

129 

 

$

79,804 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,703 

 

 

 -

 

 

1,703 

Other comprehensive income, net of tax expense of $331

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,243 

 

 

1,243 

Cumulative effect of adoption of ASU 2016-02 Leases (Topic 842) (net of $2 tax benefit effect)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(10)

 

 

 -

 

 

(10)

ESOP shares earned (3,968 shares)

 

 

 -

 

 

16 

 

 

 -

 

 

42 

 

 

 -

 

 

 -

 

 

 -

 

 

58 

Stock based compensation

 

 

 -

 

 

22 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22 

Compensation plan shares granted (5,186 shares)

 

 

 -

 

 

 -

 

 

49 

 

 

 -

 

 

(49)

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares forfeited (760 shares)

 

 

 -

 

 

 -

 

 

(8)

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

Compensation plan shares earned (11,625 shares)

 

 

 -

 

 

41 

 

 

 -

 

 

 -

 

 

118 

 

 

 -

 

 

 -

 

 

159 

Purchase of treasury stock, at cost (51,200 shares)

 

 

 -

 

 

 -

 

 

(783)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(783)

Cash dividends declared ($0.24 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(532)

 

 

 -

 

 

(532)

Balance - June 30, 2019

 

$

68 

 

$

30,995 

 

$

(9,547)

 

$

(1,407)

 

$

(123)

 

$

60,306 

 

$

1,372 

 

$

81,664 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



































4


 

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2019

 

2018



 

(Unaudited)



 

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

1,703 

 

$

1,942 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Net amortization of investment securities

 

 

27 

 

 

46 

Net amortization of deferred loan costs

 

 

296 

 

 

277 

Provision for loan losses

 

 

425 

 

 

190 

Recovery on previously impaired investment securities

 

 

(26)

 

 

(90)

Unrealized gain on equity securities

 

 

(35)

 

 

(14)

Unrealized loss on interest rate swap

 

 

94 

 

 

 -

Originations of loans held for sale

 

 

(166)

 

 

(434)

Proceeds from sales of loans held for sale

 

 

168 

 

 

440 

Gain on sale of loans held for sale

 

 

(2)

 

 

(6)

Depreciation and amortization

 

 

397 

 

 

384 

Increase in bank owned life insurance, net

 

 

(242)

 

 

(170)

ESOP shares committed to be released

 

 

58 

 

 

67 

Stock based compensation expense

 

 

181 

 

 

223 

Increase in accrued interest receivable

 

 

(215)

 

 

(27)

(Increase) Decrease in other assets

 

 

(202)

 

 

95 

Decrease in other liabilities

 

 

(421)

 

 

(698)

Net Cash Provided by Operating Activities

 

 

2,040 

 

 

2,225 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Activity in available for sale securities:

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

9,411 

 

 

4,299 

Purchases

 

 

 -

 

 

(10,072)

Purchases of Federal Home Loan Bank Stock

 

 

(285)

 

 

(20)

Redemptions of Federal Home Loan Bank Stock

 

 

 -

 

 

106 

Loan origination and principal collections, net

 

 

(48,523)

 

 

(17,805)

Additions to premises and equipment

 

 

(338)

 

 

(379)

Net Cash Used in Investing Activities

 

 

(39,735)

 

 

(23,871)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Net increase in deposits

 

 

25,014 

 

 

27,158 

Net increase in advances from borrowers for taxes and insurance

 

 

22 

 

 

28 

Increase in short term borrowings

 

 

8,000 

 

 

 -

Proceeds from issuance of long-term debt

 

 

1,050 

 

 

1,500 

Repayment of long-term debt

 

 

(4,050)

 

 

(3,800)

Purchase of treasury stock

 

 

(783)

 

 

(572)

Cash dividends paid

 

 

(532)

 

 

(458)

Net Cash Provided by Financing Activities

 

 

28,721 

 

 

23,856 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(8,974)

 

 

2,210 

CASH AND CASH EQUIVALENTS - BEGINNING

 

 

30,751 

 

 

40,913 

CASH AND CASH EQUIVALENTS - ENDING

 

$

21,777 

 

$

43,123 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

 

Interest paid

 

$

2,384 

 

$

1,619 

Income taxes paid

 

$

305 

 

$

277 

Right of Use Asset Recognized

 

$

904 

 

$

 -

Right of Use Liability Recognized

 

$

916 

 

$

 -



 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Foreclosed real estate acquired in settlement of loans

 

$

98 

 

$

82 



 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

5


 



Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)



Note 1 – Basis of Presentation



The interim consolidated financial statements include the accounts of Lake Shore Bancorp, Inc. (the “Company”, “us”, “our”, or “we”) and Lake Shore Savings Bank (the “Bank”), its wholly owned subsidiary.  All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.



The interim consolidated financial statements included herein as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated statement of financial condition at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  The consolidated statements of income for the three and six months ended June 30, 2019 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2019.



To prepare these consolidated financial statements in conformity with GAAP, management of the Company made a number of estimates and assumptions relating to the reporting of assets and liabilities and the reporting of revenue and expenses.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, securities valuation estimates, evaluation of impairment of securities and income taxes.



The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of June 30, 2019 for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.



Leases



The Company leases certain properties and equipment under operating and finance leases. For operating leases in effect upon adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognized a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset(s) during the lease term, the “right-of-use (“ROU”) asset.” The lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The ROU asset is measured at the initial amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments that are not included in the lease liability, and any impairment of the ROU asset. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations. 

6


 

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and nonlease components as a single component and account for it as a lease.



The Company’s leases are not complex; therefore there were no significant assumptions or judgements made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and nonlease components, and the determination of the discount rates for the leases.



Note 2 – New Accounting Standards



Impact of Adoption of Recent Accounting Standards



The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) on January 1, 2019.  ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated statements of financial condition for leases with lease terms of more than 12 months.  Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income. ASU 2016-02 provides for a modified retrospective transition approach basis to record the impact of adopting ASU 2016-02 on financial statements. The modified retrospective transition approach allows the lessee to recognize and measure leases on the consolidated statements of financial condition at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to recognize and measure leases on the consolidated statements of financial condition at the beginning of the period of adoption presented in our financial statements, or January 1, 2019, and will not restate prior periods.  Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $916,000 and the recognition of ROU assets totaling $904,000 as of the date of adoption. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. The initial gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The most significant effects of adoption relate to the recognition of new ROU assets and lease liabilities on our consolidated statements of financial condition for two operating leases related to branch office space; and providing additional new disclosures about the Company’s leasing activities. The Company does not expect a significant change in its leasing activities due to the adoption of ASU 2016-02. Upon adoption of ASU 2016-02, the Company recognized a cumulative effect adjustment to beginning retained earnings of $10,000. Refer to Note 5 for more information related to the adoption of ASU 2016-02. 



The Company adopted FASB ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)” (“ASU 2017-08”) on January 1, 2019. ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Under previous GAAP, entities generally amortized the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of ASU 2017-08 did not have a material impact on the Company’s consolidated financial statements or results of operations.



Accounting Standards to be Adopted



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments” (ASU 2016-13).  ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model).  Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.  Further, ASU 2016-

7


 

13 made certain targeted amendments to the existing impairment standards for available for sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  ASU 2016-13 is effective for public companies that are U.S. Securities and Exchange Commission (“SEC”) filers for fiscal periods beginning after December 15, 2019, including interim reporting periods within those periods.  An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company has determined its data requirements and is developing its methodologies for calculating the expected credit losses under the new guidance which has allowed the Company to run parallel loss reserve calculations. Data integrity associated with these methodologies is being reviewed and enhancements to the current process are being considered.  We expect that the new guidance will result in an increase to the allowance for loan losses given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under the current accounting standard.  The extent of this increase is still being evaluated.  We are also reviewing the impact of additional disclosures required under ASU 2016-13 on our ongoing financial reporting procedures.



In July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13.  The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.   For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies).  The FASB is currently in the process of drafting a proposed ASU for this project to be voted upon by FASB members after a 30 day comment period.  The Company is currently a smaller reporting company, and if this proposal is approved and becomes effective, the Company’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 



8


 

Note 3 – Investment Securities

Debt Securities



The amortized cost and fair value of securities are as follows:



 

 

 

 

 

 

 

 

 

 

 

 



 

June 30, 2019



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,011 

 

$

86 

 

$

 -

 

$

2,097 

Municipal bonds

 

 

38,323 

 

 

882 

 

 

 -

 

 

39,205 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

25 

 

 

 

 

 -

 

 

26 

Collateralized mortgage obligations-government sponsored entities

 

 

30,296 

 

 

457 

 

 

(172)

 

 

30,581 

Government National Mortgage Association

 

 

175 

 

 

12 

 

 

 -

 

 

187 

Federal National Mortgage Association

 

 

2,158 

 

 

72 

 

 

(1)

 

 

2,229 

Federal Home Loan Mortgage Corporation

 

 

3,569 

 

 

153 

 

 

 -

 

 

3,722 

Asset-backed securities-private label

 

 

 -

 

 

247 

 

 

 -

 

 

247 

Asset-backed securities-government sponsored entities

 

 

36 

 

 

 

 

 -

 

 

38 

Total Debt Securities

 

$

76,593 

 

$

1,912 

 

$

(173)

 

$

78,332 

Equity Securities

 

 

23 

 

 

35 

 

 

 -

 

 

58 

Total Securities Available for Sale

 

$

76,616 

 

$

1,947 

 

$

(173)

 

$

78,390 









9


 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2018



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

 

(Dollars in thousands)

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies

 

$

2,012 

 

$

 -

 

$

(51)

 

$

1,961 

Municipal bonds

 

 

44,546 

 

 

521 

 

 

(125)

 

 

44,942 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations-private label

 

 

27 

 

 

 -

 

 

 -

 

 

27 

Collateralized mortgage obligations-government sponsored entities

 

 

32,987 

 

 

152 

 

 

(686)

 

 

32,453 

Government National Mortgage Association

 

 

191 

 

 

 

 

 -

 

 

199 

Federal National Mortgage Association

 

 

2,367 

 

 

41 

 

 

(23)

 

 

2,385 

Federal Home Loan Mortgage Corporation

 

 

3,833 

 

 

64 

 

 

(9)

 

 

3,888 

Asset-backed securities-private label

 

 

 -

 

 

270 

 

 

 -

 

 

270 

Asset-backed securities-government sponsored entities

 

 

43 

 

 

 

 

 -

 

 

44 

Total Debt Securities

 

$

86,006 

 

$

1,057 

 

$

(894)

 

$

86,169 

Equity Securities

 

 

22 

 

 

 

 

 -

 

 

24 

Total Securities Available for Sale

 

$

86,028 

 

$

1,059 

 

$

(894)

 

$

86,193 



Debt Securities

All of our collateralized mortgage obligations are backed by one- to four-family residential mortgages.

At June 30, 2019, thirty-two municipal bonds with a cost of $10.6 million and fair value of $10.9 million were pledged under a collateral agreement with the Federal Reserve Bank (“FRB”) of New York for liquidity borrowing. At December 31, 2018 thirty-two municipal bonds with a cost of $11.0 million and fair value of $11.2 million were pledged with the FRB. In addition, at June 30, 2019 and December 31, 2018, twenty-two municipal bonds with a cost of $5.2 million and $5.6 million, respectively, and fair value of $5.4 million and $5.6 million, respectively, were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.                

10


 

The following table sets forth the Company’s investment in debt securities available for sale with gross unrealized losses of less than twelve months and gross unrealized losses of twelve months or more and associated fair values as of the dates indicated:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Less than 12 months

 

12 months or more

 

Total



 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross